176.3 million individuals were covered by employment-based health benefits in 2008.1

The percentage of individuals with such coverage was 58.5 percent in 2008, down from 64.2 percent in 2000.2

The health reform legislation enacted in March 2010 is expected to result in a net reduction of about 3 million in the number of nonelderly people with employment-based coverage by 2019.3

59 percent of employers with 3 to 199 workers offered health benefits in 2009, down from 68 percent in 2000.4 The health reform law provides subsidies, starting in 2010, to help certain small employers pay for their employees’ coverage.

The percentage of larger employers offering health benefits has held steady since 2000 at 98 to 99 percent.5

13.2 million individuals ages 65 and older had some form of employment-based health benefits in 2008 – either as an active worker, retiree, or dependent.6

Retiree coverage has been shrinking. In 2009, among employers with 200 or more workers that offered health coverage to active workers, 29 percent also offered health benefits to retirees, down from 35 percent in 2000 and 66 percent in 1988.7

In 2009, premiums for employee-only coverage averaged $4,824 ($779 from the worker, $4,045 from the employer).8 For family coverage, the average premium was $13,375 ($3,515 from the worker, $9,860 from the employer).9

Workers paid an average of 17 percent of the total cost of employee-only coverage in 2009 (up one percentage point from 2008), and 27 percent for family coverage (the same as in 2008).10

For 2010, employer health benefits costs are projected to grow by 5.9 percent, down slightly from the 6.4 increase of 2009.11

Nearly two-thirds of employers in one survey said they will ask employees to pay a larger share of health coverage costs in 2010.12

BACKGROUND

Almost six out of every 10 individuals in the U.S. had some form of health insurance coverage through an employer in 2008.13 (See chart, "Sources of Health Coverage 2008.") This is a major contrast to most other countries, where people typically obtain coverage through government programs.

Most employers, both large and small, who offer health benefits do so because in their view, there is a business case for doing so.14 These employers think that they must offer health benefits in order to recruit and retain workers in a competitive labor market.

They also think that offering health benefits has a positive effect on worker health status and therefore on productivity (a proposition backed up by research).15

Overall, private-sector employers spent $509 billion on contributions toward employee and retiree health benefits in 2008, while the federal government, state and local governments spent $145 billion. Individuals contributing to their employer-based premiums or purchasing policies in the non-group market spent an additional $246 billion.16 (The true cost for employees was actually higher, however. Click here to see text box, “How Much Do Employees Really Contribute Toward Their Health Insurance?”)

Federal and state governments offer a tax incentive for employer-based coverage. Health benefits are a tax-deductible expense for employers and they are excluded from—do not count as—taxable income to employees. This exclusion is estimated to total $94.4 billion in federal income tax revenue passed up in 2009, and $568.3 billion during 2009-2013.17

Growth in employment-based health benefits accelerated during and after World War II for numerous reasons.18 By the end of the war, health coverage in the U.S. had tripled, not because of the favorable tax treatment of premiums (the tax treatment was unclear at the time) but because employers had to compete for labor at a time of labor shortages and government-imposed wage restrictions.19 Only with the Revenue Act of 1954 did the Internal Revenue Code make it absolutely clear that employer spending on health benefits was not counted as worker income.20

The Employee Retirement Income Security Act of 1974 (ERISA) is the primary federal law governing employment-based health benefits in the private sector.21 Under ERISA, the regulation of employment-based health benefits has evolved into a system in which both federal and state laws play important roles.

ERISA relieves employers of the need to meet state-imposed mandates governing health benefits, so long as the benefits are “self-funded.” Self-funded employers pay for employees’ health expenses directly, rather than buying insurance to cover these expenses.

ERISA has been seen as a barrier to state-level health reform that would, for example, require employers to help pay for coverage for their workers. However, the Patient Protection and Affordable Care Act (PPACA) (P.L. 111-148) of 2010 imposed additional federal requirements on ERISA plans. PPACA is discussed in more detail below.

There are a number of advantages associated with using employment-based coverage as the primary means for providing health benefits. It is generally cheaper for a worker to receive the same covered services through employment-based benefits than to shop for coverage on his or her own. An employer, representing many workers, naturally has more clout in negotiating prices with insurers than any individual. Insuring a group of employees also represents less overhead cost per person for insurers than insuring an individual.

In addition, buying coverage for a group of workers means spreading the insurer’s financial risk. Most people in the group will have minimal medical expenses, balancing the small number who will need expensive care. This generally leads to lower insurance rates for groups. (And of course, the same risk sharing helps lower per-beneficiary costs for self-funded employers paying for employee health expenses directly.)

But there are disadvantages to employer-sponsored coverage as well. Because employers are not required to offer coverage, not all workers have access to it. Losing a job or deciding to start one’s own business could result in loss of coverage, as could retirement or a shift to part-time status. (Click here to see text box, “Retiree Coverage.”)

The number and percentage of people with employment-based health benefits has fallen considerably from the peak year of 2000.22 (See chart, "Trends in Employment-Based Coverage, 2000-2008.") Likewise, the percentage of smaller employers (those with fewer than 200 employees) offering coverage is down since 2000, especially noticeable among employers with three to nine workers.23 (See chart, "Percentage of Employers Offering Coverage, by Firm Size, 2000 - 2009.")

Responses to Premium Increases

Premiums have been increasing faster than inflation, workers’ earnings and the gross domestic product (except for 2006, when GDP grew at a slightly faster pace). Between 2001 and 2009, the average cost of health premiums increased by 95 percent for employee-only coverage24 and 108 percent for family coverage,25 while the Consumer Price Index increased 25 percent.26 27 (See chart, "Percent Increase in Health Insurance Premiums Compared to Other Indicators, 2001 - 2009.")

Premium As premiums have risen over the years, employers have tried different strategies to curb the growth in their health care costs. One way is to have employees pay more out-of-pocket for deductibles and co-payments. (See Glossary for definitions.) This means less expense for insurers (and self-insured employers) and, theoretically at least, lower premiums.

For instance, workers in preferred provider organizations having a general annual deductible for single coverage saw their yearly deductible more than double from 2003 to 2009 – from $275 to $634.27 28

Among their cost containment strategies, employers have not made employees pay a noticeably higher portion of the premium. Workers have been paying about 16 percent of the premium for single coverage since 2002, and between 26 and 28 percent of the family premium.29

The year 2010 may see a slackening in the pace of employer health costs. A survey of large employers by the Mercer company projects a 5.9 percent growth in total employer health benefit expenses, down from the 6.4 percent uptick in 2009. Another change: Nearly two-thirds of employers said they would require employees to pay a larger share of health coverage costs than in 2009.30

To help reduce costs, employers have also shown interest in a relatively new type of health plan. Frequently referred to as consumer-directed health benefits, these plans combine higher deductibles with tax-preferred accounts that can be used for out-of-pocket health care expenses. (Click here to see text box, “Consumer-directed Health Plans.”) The plans encourage employees to be more cost conscious about their health care spending, since they feel as if they are spending their own money for expenses up to the deductible amount. For 2010, minimum deductibles of $1,200 for self-only coverage and $2,400 for family coverage were required for an individual to be eligible to make tax preferred contributions to their health savings account (HSA).31

Enrollment in consumer-directed plans is growing slowly. A report by the Employee Benefit Research Institute found that in 2009, 4 percent of privately insured people aged 21 – 64 were enrolled in a health savings account (HSA) or health reimbursement arrangement (HRA) linked to a high-deductible health plan. This compared with 3 percent in 2008.32

Patient Protection and Affordable Care Act of 2010 (PPACA)

The Patient Protection and Affordable Care Act of 2010 (PPACA) enacted on March 23 has major implications for employment-based health benefits. The PPACA was amended on March 30 in a reconciliation act (HR 4872).

The law provides some immediate benefits, such as subsidies to help small employers provide health coverage and allowing dependents up to age 26 to stay on a worker’s health plan. In later years, the law carries penalties, such as the requirement that employers with 50 or more workers must offer health coverage or pay a $2,000 fee per full-time employee (with the first 30 employees excluded).

2010

Temporary reinsurance program for retiree health benefits: Employers are able to apply for a subsidy to cover 80 percent of the cost of claims between $15,000 and $90,000 for retirees ages 55 and older who are not yet eligible for Medicare. $5 billion was set aside for use until Jan. 1, 2014, or when the funds are exhausted.

Subsidies to employers: Employers with fewer than 25 employees and average annual earnings below $50,000 are eligible for a tax credit to cover part of their cost of providing health insurance. Between 2010-2013, a tax credit of up to 35 percent of the employer’s costs is available for employers contributing at least 50 percent of the premium. In 2014 and beyond, a 50 percent tax credit is available, but only for two years. Tax-exempt organizations can claim a 35 percent credit starting only in 2014.

Ban on lifetime limits for covered expenses and restrictions on annual limits.

Dependents are allowed to participate in the plan until their 26th birthday.

Pre-existing conditions for dependent children under age 19 are prohibited.

Ability to designate OB/GYN or pediatrician as primary care physician.

2011

Tax penalty on nonqualified HSA withdrawals doubled to 20 percent.

Over-the-counter medicine not eligible for FSA, HSA, or HRA reimbursement unless obtained with a prescription.

2012

Employers are required to report the value of health coverage on W-2 forms (covering the year 2011).

Health plans are required to pay, in FY 2013, a comparative effectiveness/patient-centered outcomes fee of $1 multiplied by average number of covered lives in the plan. The fee goes up to $2 for plan years ending after Sept. 30, 2013

Employers who do not provide qualifying health coverage are required to pay $2,000 per full-time worker (first 30 workers are excluded). Employers with 50 or fewer workers are excluded from penalty. Penalty applies only if one or more workers opt out of employer coverage and receive subsidized coverage through a health insurance exchange.

Employers required to offer a “free choice voucher” to employees with incomes less than 400 percent of FPL whose share of the premium exceeds 8 percent but is less than 9.8 percent of their income and who choose to enroll in a plan in the health insurance exchange. The voucher is equal to the employer portion of the premium.

Automatic enrollment required for employers with 200 or more workers.

2017

States may allow employers with 100 or more workers to provide health benefits through health insurance exchange.

2018

Excise tax on high cost health plans. A 40 percent excise tax is imposed on plans with an aggregate value exceeding $10,200 for individual coverage or $27,500 for family coverage. The tax is applied to the value of the plan above those thresholds.

Keep in contact with your state medical association, state business groups (Chamber of Commerce, National Federation of Independent Business), health consumer groups and other groups active in coverage issues.

Remember that AARP has an interest in employment-based health benefits as well as in Medicare. State chapters can be helpful in providing reaction to private-sector or government health proposals.

Don’t overlook your state insurance department as a source of data, expert comment and story ideas

Take an insurance agent out to lunch. Learn how they think about “managing risk,” and why it’s important to have enough people in an insurance pool who won’t need expensive services anytime soon, to offset those who will.

Build and update a data resource bank for your state with the number of insured/uninsured, sources of coverage, recent trends, etc. (Statehealthfacts.org , a service of the Kaiser Family Foundation, has a wealth of information for your state.)

Identify and keep in close touch with state officials (legislative and executive) who work on health issues. State lawmakers often are among the first to know when a major health issue is developing in a state.

Keep an eye on the docket for the state supreme court in your state for health issues that may result in important judicial opinions.

Are local small businesses applying for federal tax credits to help pay for their workers’ coverage?

Find local people who are employed but who do not have employment-based health benefits, and explain the reasons why they do not. Do they expect their situation to change after full implementation of the PPACA?

Do the same with the so-called “underinsured,” those who have skimpy coverage. Will their situation improve as a result of the health reform law?

Check with consumer groups to see how they plan to help the uninsured take advantage of the new reform law.

Are small business people in your area welcoming the new reform law and its health insurance subsidies, or are they worried about the increased costs that it could mean for them?

Be on the lookout for two key reports each year on trends in employer-sponsored coverage: the Kaiser/HRET Annual Employer Health Benefits Survey (www.kff.org/insurance/employer.cfm), usually released in September, and the annual report on health benefits from Mercer Consulting (www.mercer.com), usually released in November. Both give you a hook for stories about local trends.

What are business groups doing to control the cost of health coverage?

What do local people who now have coverage through their job think of getting health coverage through an insurance exchange instead??

What provisions in the PPACA do some business groups want to see repealed? How might release of guidance and regulations impact implementation and effectiveness of the legislation?

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Effect of Young Adults' Coverage on Employers

Roland McDevitt of Towers Watson discussed the effect on employers of provisions in the reform law allowing young adults to remain on their parents' coverage. From the May 24 briefing cosponsored by The Commonwealth Fund. (12 min.)

New Jersey’s beleaguered public worker health insurance fund got a nearly $39 million cash injection last year from a piece of the controversial federal health insurance law that Governor Christie derides as “Obamacare.”